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Macroenvironmental determinants of operational loss severity

  • Cope, Eric W.
  • Piche, Mark T.
  • Walter, John S.
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    We investigate the relationships between the severity of operational loss events reported in the banking sector and various regulatory, legal, geographical, and economic indicators. Based on a data sample of over 57,000 losses incurred in more than 130 countries reported by the Operational Riskdata eXchange (ORX) consortium, we identify the most relevant exposure indicators for losses in four Basel II event categories: Internal Fraud; External Fraud; Employment Practices and Workplace Safety; and Clients, Products and Business Practices. We find evidence of significant correlations between Internal Fraud and constraints on executive power and the prevalence of insider trading. Clients, Products and Business Practices losses are significantly related to securities and shareholder protection laws, restrictions on banking activity, supervisory power, and the prevalence of insider trading. Other event types are sensitive to per-capita GDP and a governance index.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426611003414
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 5 ()
    Pages: 1362-1380

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:5:p:1362-1380
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    1. Paul Povel & Rajdeep Singh & Andrew Winton, 2007. "Booms, Busts, and Fraud," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1219-1254.
    2. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    3. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank.
    4. Juan Botero & Simeon Djankov & Rafael LaPorta & Florencio López-de-Silanes & Andrei Shleifer, . "The Regulation of Labor," Working Paper 19483, Harvard University OpenScholar.
    5. Allen, Linda & Bali, Turan G., 2007. "Cyclicality in catastrophic and operational risk measurements," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1191-1235, April.
    6. Dahen, Hela & Dionne, Georges, 2010. "Scaling models for the severity and frequency of external operational loss data," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1484-1496, July.
    7. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "What Works in Securities Laws?," Working Paper 19491, Harvard University OpenScholar.
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